Penny for Their Thoughts

Industry experts voice their views on the economic slowdown and what it will mean for your club

It's the year 2001 and the grass isn't so green on the other side of the millennium. Across America, gas prices are skyrocketing, and the energy crisis in California has resulted in rolling blackouts. Labor costs are soaring, the dot-com industry has had the rug pulled out from under it, and unemployment is increasing. Public confidence is down, and the economy is moving at a snail's pace. Vice President Cheney has even publicly stated that the United States is on the “front edge of a recession.”

Cheney isn't the only one expressing a grim forecast for the country. According to the UCLA Anderson Business Report, released in April, there is a 90 percent probability that a recession will take place.

Such a bleak financial future can only mean that the country will begin to tighten its belt. This begs the question: How will the fitness industry be affected? And is the dreaded r-word really on its way?

Russo answers her own question with statistics that indicate that a recession isn't such a far-fetched forecast for our country. So far, according to the analyst, consumer confidence is down 25 percent (109.2 in April) since its peak in August of 2000 (144.7), and unemployment rates have had the highest reading in five years.

Consumer Spending

On the positive side, not all financial indicators point toward a recession. Discretionary spending (typically measured by new car or home sales, as well as by vacations) seems to be on track. In other words, consumer concerns about the economy and job safety haven't curbed high-priced purchases — which may indicate that consumers aren't concerned about those things at all.

“Car sales and home sales, two of the harbingers of the economy going down, are still going relatively strong,” says Ken Goldstein, an economist with the Conference Board, a worldwide business membership and research network. “Those kind of numbers tend to counter all the doom and gloom going on about the stock market.”

Since the financial indicators conflict (e.g., consumer confidence is down, yet discretionary spending isn't), it's difficult to say with certainty what will ultimately happen to the economy. Is there a recession coming? “I really don't know,” admits Steven Schwartz, president of Tennis Corp. of America (TCA). “Consumer spending is 70 percent of the market. Until the consumer stops spending, you can still chug along.”

Discretionary spending, club operators are hoping, will extend well beyond car and home purchases to gym memberships as well. And, according to our industry's history, memberships typically haven't been affected even in times of economic recession. “From a health club perspective — just from experience — I've not felt a pullback,” says Gene LaMott, COO of Gold's Gym International. “In fact, I've seen an increase [in memberships] because we're a very inexpensive form of entertainment.”

And, LaMott continues, health clubs offer something that everyone needs: fitness. “New membership sales are basically at an all-time high,” he says. “I think people are making wiser decisions about their health…. They're taking their discretionary spending and re-appropriating it.”

Jill Kinney, COO and co-founder of Club One chain, reaffirms LaMott's viewpoint. “I still believe that our industry, because of the price point, we're kind of under the radar screen. That ratio of price to value is very low.”

But even strong discretionary spending habits aren't enough to convince many club operators that the economy hasn't been weakened. In fact, Mark Mastrov doesn't just think a recession is on its way. He thinks it's already here.

“We are in a recession and things are slowing down,” states the 24 Hour Fitness Worldwide president/CEO matter-of-factly. “It varies based on where you are in the country, but each month [the economy is] slowing down more and more.”

Don Konz, the CEO and president of the Washington, D.C.-based club chain Sport & Health Co., agrees. “We are seeing an impact on our industry with what is happening in the economy more so than I've seen in the past,” he says.

Bally's Take

Even the biggest club chain of them all, Bally Total Fitness, has adopted a wait-and-see attitude. While Bally officials chose not to be interviewed for this article, a recent press release did outline Bally's opinions regarding an economic slowdown.

“Economic conditions, particularly recent news of rising unemployment and energy concerns, appear to be creating some trickle-down impact on the retail environment overall,” stated Bally's Lee Hillman in the release. “While we [Bally] have seen no impact to date on our revenue streams from existing members including collections of receivables, dues and in-club products and services, it is unclear whether conditions may be having a slight impact on the number of new membership originations.”

Other operators and economic experts share this uncertainty. Goldstein, for example, doesn't believe a recession is on the way, while Kinney calls the current economic climate a “slowdown.”

“Certainly it's been a shakedown of dot-coms,” she explains, “but quite frankly, those businesses weren't making money anyway.”

“Those sectors [of the high tech industry] are definitely in a serious recession,” adds Konz, whose own club chain owes a tidy chunk of its membership to companies who were subsidizing employees' fitness memberships. Since it's typically high-tech companies like the dot-coms that subsidize these memberships, Konz worries that when these companies start cutting costs, those fitness perks will be the first expense to go.

“We have approximately 5,000 members whose monthly dues are being subsidized by their companies,” he says of his 65,000-member chain. “We are focusing strategically on this select group of people and are devising” a Soft Landing Strategy. Possible plans for this strategy, Konz says, include the club chain agreeing to cover the cost of the membership for a short period of time to keep the member at the club in the long run.

“I have always felt that the club business always comes through unscathed [during a recession], simply because…it's more of one of life's necessities rather than an amenity,” he adds. “This time, however, because of the Internet connection…it leaves me worried.”

Finding Your Niche

Clubs that do rely heavily on the high-tech industry for a heavy percentage of their membership do, conceivably, have reason to worry. But membership will probably not be affected equally across the board. As each health club caters to a different market segment and a different niche of the American population, the effects of the slowing economy will likewise vary.

“A national recession is almost a non sequitur,” says Schwartz. “Our country is so complicated. There are places in our country that do well in a recession and there will be some that do poorly.”

And, in a sense, the health industry's glass is half full, so to speak. “Our product is not a widely accepted product,” Schwartz says. “We can grow more than the economy can hurt us.”

In addition, because health and fitness clubs belong to a consumer-supported industry, they may have an advantage right now. “So far the slowdown…has been business led and that's important,” stresses Russo, “because consumer spending comprises two-thirds of the economy.” In other words, while businesses have been pinching their pennies, consumers haven't, as indicated by new car and home purchases.

That being said, Herb Lipsman, the vice president of development for the Texas-based Houstonian Hotel Club and Spa, warns against complacency. “I think it would be a mistake for club owners to think they're immune,” he says.

A Slowdown in Sales

Even if existing members do not quit clubs during times of economic stress, new memberships and optional service sales may slow down. For example, a member may be willing to continue her payment of $45 a month for access to the club, but she won't part with an additional $50 an hour for a personal trainer appointment or a massage.

“That's the theory among industry experts,” agrees Gary Cooper, the leisure researcher analyst for Banc of America Securities. “In times of recession, these ancillary sales are hurt.” Other optional items up on the chopping block could include nutritional and supplement sales, special classes that require a fee outside of the normal membership, and spa services.

“Personal service sales have dropped off 10 percent for us,” Kinney notes.

Besides not being able to come up with the cash for any extras beyond basic membership, members may not be able to afford more expensive memberships, Russo believes. “At the higher end, people are not selecting the most expensive membership option,” she says.

“[O]n the high end of the spectrum, if you can buy a fitness membership for $100 a month or for $50 a month, that extra $50 is discretionary spending. The more expensive clubs are at a higher risk for a prolonged downturn than more moderately priced clubs.”

Mastrov agrees. “I think new enrollments will slow a little bit and I think higher priced memberships will go down…,” he says. “Higher-priced clubs are going to feel the crunch a little bit.”

And, Mastrov adds, the high-end clubs may have plenty of company while they are weathering the adverse economic conditions. “Mom and pop clubs are going to have to work a little harder,” he says. “Big chains may have an infrastructure that may help them a little bit.”

Schwartz, who disagrees with those who predict hard times for high-end clubs like TCA, expects help from the very nature of his chain's memberships. He points out that high-priced clubs draw more affluent members. These people are less likely to be affected by economic conditions, and so will continue their membership. Even if these members do feel the crunch, they will budget for it.

“We're in the high end of the business and I would take an opposing viewpoint,” Schwartz says. “In the higher end, people are not losing their jobs. I would think we would be the last hit.”

And, according to experts, the fitness industry tends to do well regardless of economic conditions because most people view their memberships as necessities, not luxuries — particularly on the high end. People who belong to high-end clubs use their membership as a chance to network with other executives, thus making it a doubly important for them to continue going to the club.

“Health clubs have become a social and networking environment…at the higher end, and that's not something you want to give up,” explains Schwartz. “The health club where they socialize and network and blow off steam will be one of the last things they cut.”

“That kind of spending tends to go up as the economy goes down,” Goldstein agrees. “Those people want to blow off steam.”

Take It to the Bank

Though consumers may be able to rationalize spending the extra cash every month for their gym membership, health clubs may find banks and other financial institutions more tight-fisted. So even if club membership remains strong, expansion efforts could stagnate.

Kinney, whose club recently completed a $24.4 million re-capitalization program, admits, “We're really glad we raised the capital we wanted to raise in 2000 and not 2001.”

“It's tough to raise capital right now…,” Mastrov points out. “I think there will be very slow growth in the club industry in the next few years.”

This may come as a shock to clubs, as this industry has enjoyed comparatively easy credit the over the past few years. With the nation digging in its heels at this recent economic slowdown, banks are understandably becoming more cautious.

“Unquestionably there has been too much easy capital in our industry in the past four or five years,” Schwartz says. “I think that's going to cause some people to go out of business.” (TCA has been preparing for this slowdown for the past 18 months by making sure the individual facilities are in top form and buying down any debts they may have incurred.)

Konz, whose own Sport & Health Co. club chain is currently in the midst of an extensive, $20 million investment, agrees capital will be scarce commodity for many club operators. “The industry itself seems to be vital and stronger than ever,” he says. “But what will be difficult will be to borrow money.”

Which would only be one of the difficulties that the industry would face amidst economic turmoil. Still, on a positive note, stressful business conditions test the mettle of health clubs and allow them to realize their potential. To paraphrase Nietzsche, what doesn't kill you only makes you stronger.

“Great companies are built in tough times,” Schwartz explains. “The most important thing to do is to have good business practices and be priced appropriately.”

RECESSION RECAP

Economic recessions are nothing new. There have been, in fact, nine recessions since the end of World War II. Will the year 2001 be recession No. 10? Only time will tell.

RECESSION

DURATION PEAK

JOBLESS RATE

November 1948 to October 1949

11 months

7.9 percent in October 1949

July 1953 to May 1954

10 months

6.1 percent in September 1954

August 1957 to April 1958

8 months

7.5 percent in July 1958

April 1960 to February 1961

10 months

7.1 percent in May 1961

December 1969 to November 1970

11 months

6.1 percent in August 1971

November 1973 to March 1975

16 months

9 percent in May 1975

January 1980 to July 1980

6 months

7.8 percent in July 1980

July 1981 to November 1982

16 months

10.8 percent in December 1982

July 1990 to March 1991

8 months

7.8 percent in June 1992

*source: National Bureau of Economic Research, Bureau of Labor Statistics